Updated from 1:22 p.m. EDT

Crude futures eased Tuesday as traders debated whether political tensions in the Middle East were fully accounted in oil prices. An Energy Department report showing slower growth in Chinese demand contributed to the selling.

After reaching a record high of $63.99 yesterday, oil for September delivery closed down 87 cents to $63.07 Tuesday on Nymex. Gasoline futures fell 3 cents to $1.83.

Oil prices surged Monday after the U.S. Embassy in Saudi Arabia closed due to terror threats. The embassy and U.S. consular offices remain closed for a second day Tuesday.

Iran's reinstitution of its nuclear program despite U.N. and European opposition also ignited concerns over a potential supply disruption from OPEC's second-largest producer.

In its monthly oil market outlook Tuesday, the Energy Department projected Chinese demand growth for 2005 and 2006 of 500,000 barrels a day. That's down from 2004, when demand grew by 1 million barrels a day.

Globally, the department sees demand growth slowing to 2.1% this year and next from 3.2% in 2004.

Traders were also taking positions ahead of Wednesday's U.S. inventory report. The Energy Department is estimated to say that crude levels dropped by 250,000 barrels in the week ended Aug. 5, while gasoline inventories probably fell by 2 million barrels. Distillates stocks, which include jet fuel, heating oil and diesel, are estimated to have risen by 1.2 million barrels.

A multitude of refinery outages in the last few weeks have boosted gasoline retail prices to record levels. News reports count as many as a dozen refinery problems that occurred since July 7, which together process more than 2.5 million barrels a day.

Some say refinery shutdowns have contributed to rising crude oil prices. According to one argument, a shortage in refining capacity has increased the demand for light, sweet crude, because it has less sulfur and is easier to process into lighter fuels such as diesel.

Refineries could also be buying more crude, betting that the spread between the price of oil and the refined products will continue to widen.

Others, however, say that refining shortages should actually reduce the demand for crude and that the geopolitical tensions are the only reason for the oil price hike.

Tim Evans, senior market analyst at IFR Markets, says speculation remains a key catalyst in futures trading. At more than 860,000 contracts, open interest is just below the all-time high set in April, says Evans. He's skeptical bulls can push prices up much further.

"We have been trading near the high end of a weekly price channel that topped at $64.32. I don't see that prices will go higher than that," he says.

In corporate news,

Crosstex Energy

(XTEX)

, which gathers, transmits and processes natural gas in the Gulf Coast, agreed to acquire

El Paso's

( EP) processing and liquids business in South Louisiana for $500 million. The deal includes the Eunice processing plant and fractionator, the Pelican processing plant, the Sabine Pass plant and the Riverside processing and fractionation facilities.

Crosstex said that continued exploration and development of the deepwater Gulf of Mexico is yielding oil reserves "with large amounts of associated gas, which is richer in liquids content than these plants have historically been processing." It also expects the plants to benefit from a future increase in LNG imports.

The company also reported that its second-quarter net income dropped to $1.7 million, or 14 cents a share, from $2.4 million, or 19 cents a share, a year ago. Shares of Crosstex increased $1.67, or 4%, to $43.36.

The independent oil and gas producer

Comstock Resources

(CRK) - Get Report

said second-quarter earnings fell to $12.7 million, or 30 cents a share, from $18.7 million, or 52 cents a share, last year. That also misses analysts' average earnings estimate of 27 cents a share, according to Thomson First Call.

The company said increases in production were offset by higher production expenses. Shares fell $1.85, or 6.5%, to $26.85.

Among the major oil producers, shares were mixed.

Exxon Mobil

(XOM) - Get Report

rose 1%,

Chevron

(CVX) - Get Report

fell 0.1%,

ConocoPhillips

(COP) - Get Report

lost 0.8%, and

BP

(BP) - Get Report

rose 1.5%.

Shares of the pipeline company

TransMontaigne

(TMG)

fell 20% after the company said fiscal third-quarter results will be "significantly below" its last two quarters' earnings. The company expects its fiscal 2006 results to be lower than 2005.